Report 97502 Summary - August 1997

Prison Industry Authority:

Has Failed To Take Significant Corrective Action on Many State Auditor Recommendations

Results in Brief

The Prison Industry Authority (PIA) was established on January 1, 1983, as the successor to the California
Correctional Industries Commission. The PIA is a penal program that employs inmates, develops inmate work skills, and reduces
the cost of California Department of Corrections (CDC) operations. As such, the PIA manages approximately 73
manufacturing, service, and agricultural facilities at 23 of the 30 CDC institutions throughout the State. The PIA employs
roughly 6,600 male and female inmates. Its products are sold principally to departments of the State, which are required by
law to purchase items manufactured by the PIA. For fiscal year 1995-96, the PIA had sales of approximately $147
million, the third highest in its history.

In 1995, the Joint Legislative Audit Committee requested the Bureau of State Audits (BSA) to evaluate the PIA's
costs, quality, and customer service. In April 1996, the BSA issued an audit report titled "Prison Industry Authority:
Statutory and Cost Control Problems Adversely Affect the
State." The report was very critical of the PIA and its operations.
The audit concluded that the PIA has significant weaknesses in its financial management, cost-accounting systems,
and operations management, and, along with the CDC, does not measure or report on the benefits inmates derive from
the PIA's work program. Our 1996 report included 37 recommendations for the PIA and CDC to improve the
PIA's operations. In addition, we made 4 recommendations specifically to the CDC addressing steps it could take to
improve its operations affecting the PIA. Because of the significance of these recommendations, the BSA determined a
follow-up audit of the PIA was warranted. Our current audit examines the actions the PIA has taken over the past 15 months
to implement the April 1996 audit recommendations.

Overall, the PIA has been slow to implement the recommendations made in our 1996 report. We found that, despite
the PIA's claims, its Enterprise Review Teams do not address the critical cost control or operational improvement
recommendations. However, the PIA has closed and consolidated several enterprises, actions that address our recommendation
to identify enterprises to be scaled back or eliminated. Further, its one-dimensional approach to meeting delivery goals
has contributed to steadily increasing inventories; we estimate that the PIA's excess inventory has doubled from $15.9
million in fiscal year 1994-95 to $31.9 million in fiscal year 1996-97. The PIA has taken little or no action to implement the
cost-accounting recommendations that are key to managing its operations. Finally, neither the PIA nor the CDC has
focused on the benefits inmates derive from the PIA's program. However, the PIA has responded to several
recommendations, including conducting a customer survey, incorporating performance measures in its strategic plan, and modifying
its annual report to the Legislature.

Recommendation

We believe the recommendations made in our April 1996 report are critical to the PIA's successful operations as
a business and as a penal program. As such, the PIA should re-examine all the recommendations and its current course
of action and ensure its efforts bring prompt and effective change to its operations.

Agency Comments

In their response, the Prison Industry Board (board) and the PIA recognize that although progress has been made, there
is still work to be done to address the recommendations contained in the April 1996 report. The board and the PIA
state that the Enterprise Review Teams provided valuable information but were not the only method the PIA used to
analyze enterprises for improvement. The PIA believes that comparisons of its inventory levels with the private sector
is inappropriate citing its operational environment and new Prompt Delivery Program (PDP) as factors. However, the
PIA also acknowledges that there is room for improvement in its inventory management. The PIA does not agree with
the report's finding regarding its progress in implementing the cost accounting recommendations from the April 1996 report.
However, the PIA does not believe that these recommendations should be pursued independent of the three
phase framework recently developed by its outside consultant. The PIA states that it is committed to long-term improvement
of its cost-accounting system. Finally, the PIA and the California Department of Corrections (CDC) state that a measure
of the benefits inmates derive from the PIA's inmate work program could be developed; an evaluation of the PIA's
effectiveness in helping to provide a safe prison environment is planned. Both parties anticipate that the inmates involved in
the PIA's work program will reflect less incidence of wrongdoing.

To provide clarity and perspective, we provide our comments to the response from the board and the PIA at the end
of this report.